Via this post on the California Corporate & Securities Law blog, which is maintained by Keith Paul Bishop of Allen Matkins, I learned of the recent Ninth Circuit opinion in WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc. (go here for a PDF copy).
This dispute involved a second amended and restated right of first refusal and co–sale agreement—what a mouthful!—between Spot Runner and its founders (the defendants) and its investors, including WPP (the plaintiff). Here’s the provision at issue:
Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by written instrument signed by the party against whom enforcement of any such amendment, waiver, or discharge or termination is sought; provided, however, that the holders of sixty percent (60%) of the Shares held by the investors voting together may waive, discharge, terminate, modify or amend, on behalf of all Investors, any provisions hereof.
I’ll let Keith Paul Bishop take it from there:
The plaintiff generally alleged that the the executives of a privately held company, Spot Runner, Inc., solicited the purchase of shares by the plaintiff at the same time that those executives were selling personally owned shares and when the company was incurring substantial losses. Under Rule 10b-5(b), a defendant can be liable for an omission of material information if she has a duty to disclose. The plaintiff argued that the defendants had a duty to disclose based on a Right of First Refusal/Co-Sale Agreement. In response, the defendants contended that the notice had been waived pursuant to a provision in the agreement that allowed waivers by “the holders of sixty percent (60%) of the Shares held by the investors voting together”. According to the defendants, two other investors who owned the requisite 60% had waived the plaintiff’s right to receive notice. The plaintiff, however, contended that the “voting together” language in the agreement required that all investors participate in the vote. In other words, there had to be be an opportunity for a vote by all shareholders.
So what we have here is, yet again, syntactic ambiguity. Here’s what the court said (footnote and citation omitted):
Although the language of the ROFR/Co–Sale Agreement is somewhat ambiguous, WPP gives the far more natural interpretation. Importantly though, and aside from a resolution of the actual meaning of this provision of the Agreement, where the language of the contract is unclear, a court must look to evidence outside the pleadings. As such, resolution of the disputed meaning of the contract on a motion to dismiss is inappropriate. If WPP’s interpretation of the contract proves to be the intended meaning, then it will have adequately shown that an opportunity for a vote by all shareholders was required before the rights in ROFR/Co–Sale Agreement could be waived; that this vote did not occur; and accordingly, that the Founders violated a duty founded upon the Agreement to properly disclose their sales in the secondary offering.
But I’m not particularly interested in rummaging through the entrails of the dispute. Instead, I was wondering how I’d have drafted the provision in question so as to avoid dispute. I think getting it right involves more than avoiding syntactic ambiguity.
My main issue is with the notion of a vote of shares. The shareholders of a corporation vote their shares at any meeting of shareholders, or act by written consent. That’s not what’s contemplated in the contract. Instead, the provision in question concerns contract rights of the shareholders—in effecting a waiver, the shareholders would be acting on their own behalf, rather than on behalf of the corporation, so it seems odd to invoke the notion of a vote of shares. Furthermore, Spot Runner’s certificate of incorporation apparently didn’t require a vote of shareholders in this context.
And requiring a shareholder vote would have been not only unnecessary but also pointless and confusing. If two shareholders controlled the necessary shares, requiring a shareholder vote would have simply added pointless procedural hurdles. And if that vote weren’t covered by the certificate of incorporation, what procedures would be followed?
So I would have eliminated any reference to a vote of shares. Here’s my version:
No waiver of any provision of this agreement will be effective unless it is in writing and signed by the one or more parties granting the waiver, except that a waiver signed by holders of at least 60% of the then-outstanding Shares held by the Investors will be deemed to constitute a waiver by all Investors.
[And here’s my version revised on September 7, 2011, to reflect Westmorlandia’s comment:
No waiver by any party of any provision of this agreement will be effective as to that party unless it is in writing and signed on behalf of that party. A waiver signed by one or more Investors holding at least 60% of the then-outstanding Shares will be deemed to constitute a waiver by all Investors.]
I also got rid of any mention of amendment—I’d rather address that in a separate section. And instead of the cumbersome “the party against whom enforcement of any such … waiver … is sought” I used instead “the one or more parties granting the waiver”.
I did this on the fly, so I may have missed something. If I screwed up, I’m sure you’ll let me know.